If you have been in business for a while there is a good chance that you have heard the term balance sheet, either from your accountants or someone else, although not everyone knows what it is or what it can tell you.
In simple terms a balance sheet is a snapshot of your company’s position at any given time, most likely you will see the position at your financial year end as part of your company’s accounts. It is an overview of all the assets and liabilities that your company has, ranging from bank balances and outstanding sales invoices (assets) to HMRC liabilities and outstanding purchase invoices (liabilities).
The end of the balance sheet will show you the “net” position of your assets and liabilities, otherwise known as the business’s equity. Essentially it shows the business financial position after considering all assets and liabilities.
The balance sheet is a great financial tool if used correctly, we have briefly shown below what we believe are the key takeaways and how to make use of your balance sheet.
Short term solvency & liquidity
The balance sheet, by comparing your assets and liabilities, can help highlight how your business is performing and whether your company can meet its immediate obligations. It can also help show how liquid your business is, or in simple terms how much cash is readily available. Both are very important to make sure your business keeps running smoothly day to day.
Capital Structure
The balance sheet will show your level of debt, or liabilities, compared to the total equity. The benefit of this is that you can easily see how your company is growing, and more importantly whether you are relying too heavily on borrowed money.
Asset Management
By reviewing the assets on the balance sheet, alongside revenue, you can ascertain how effectively you are using assets to help generate income and help the business grow in the long-term.
Working Capital Position
The capital position is the difference between your assets and liabilities and generally shows the capital “buffer” your company has, i.e. the amount of additional funds your company can utilise. This is a brilliant way to show if your company can comfortably maintain its day to day activities.
Net Worth
The equity section of the balance shows the current value in the company left for you, after clearing all liabilities. This gives you a good idea of the company’s value and the overall success of the company.
If you’d like any more details, or to dive deeper into your balance sheet please get in contact with us.
